The Corporate Sustainability Reporting Directive (CSRD) marks a significant shift in how companies in the European Union approach sustainability reporting. Replacing the Non-Financial Reporting Directive, which was introduced in 2014, the CSRD introduces a comprehensive framework mandating extended reporting guidelines for businesses, emphasizing a "double materiality" perspective. CSRD therefore introduces a mandate that requires companies to report on sustainability-related information that not only affects their business operations, but also relates to the impact their business has on society and the environment.
Who Must Comply?
European companies meeting specific criteria are bound by the CSRD. Additionally, non-EU companies with substantial operations within the EU will eventually have to comply, provided they meet certain revenue and operational criteria. Specifically, companies meeting two of the following three conditions will have to comply with the CSRD initially:
€50 million in net turnover
€25 million in assets
250 or more employees
In total, it will impact 50,000 companies across Europe, and a few thousand more based outside of Europe.
Compliance Timeline The CSRD is set to roll out between 2024 and 2028, varying depending on company size, with larger entities mandated to comply earlier.
January 2024: CSRD requirements start for those already in scope of the pre-existing Non-Financial Reporting Directive (NFRD), which requires about 11,700 large companies across the EU to publish a non-financial report on their ESG performance together with their annual management report. These companies therefore will be reporting against CSRD first in 2025.
January 2025: Other large companies will be required to report if they meet two of the following criteria: €40 million in net turnover, €20 million in assets, 250 or more employees.
January 2026: SMEs listed on regulated markets will be required to report but have to option to opt-out until 2028.
January 2028: Non-EU companies will be required to report if >€150m EU revenue with 1 or more subsidiary in the EU.
Key Mandates of CSRD:
Double Materiality: This fundamental aspect requires companies to evaluate and disclose both their impacts on people and the environment (impact materiality) as well as the sustainability matters that financially affect the company (financial materiality).
Targets and Progress Reporting: Companies are obligated to set sustainability targets, establish baselines, and track and report progress towards these goals.
Extensive Reporting Scope: CSRD expands reporting requirements to broader impacts across the entire value chain, given that the double materiality requirement extends the included scope.
Link with EU Taxonomy and TCFD (now IFRS S1 and IFRS S2) alignment: The directive integrates reporting aligned with the EU Taxonomy (a classification system that defines criteria for economic activities that are aligned with a net zero trajectory by 2050 and the broader environmental goals other than climate), ensuring consistency with established frameworks. Furthermore, companies must align their disclosures with what was the Task Force on Climate-related Financial Disclosures (TCFD), now the IFRS S1 and IFRS S2 standards.
CSRD builds on the Non-Financial Report Directive, which required reporting on:
Human rights violation
Combating corruption and bribery
CSRD extends this obligation to report to include the following aspects among others:
Combating climate change
Water and marine resources
Resource use and circular economy
Biodiversity and ecosystems
All reports must refer to the 1.5-degree Paris target. A mandatory external review of the reports has also been added.
What does CSRD mean for SMEs?
The CSRD doesn’t place any new reporting requirements on small companies, except for those with securities listed on regulated markets. And to make it easier for listed SMEs, they can report using simplified standards, although these have yet to be established.
But while the CSRD doesn’t apply to non-listed SMEs, the European Commission has also proposed developing separate standards that non-listed SMEs could voluntarily use. These standards would be scaled to fit SMEs’ capabilities and would make it easier for SMEs to report information to banks, clients, and investors – helping SMEs play their role in the transition to a sustainable economy.
The expanded scope of CSRD will likely also increase the burden on SMEs to provide data to corporate clients, to enable them to meet their own regulatory obligations.